The $460 million figure is also in flux. Mayor Gavin Newsom suggested it would drop even further, particularly if the economy improves, although there is uncertainty over the state budget picture.

“This is easily dealt with,” the mayor said earlier this week after addressing a gathering of business leaders, where he ticked off recent fiscal successes like preserving the city’s bond rating and balancing the budget without raising taxes or laying off police and firefighters.

“I say that somewhat tongue in cheek,” Newsom continued. “But what I must underscore is every year we go through this cycle of sort of exploiting the worst, and at the end of the day, we never see the worst. … For three years we’ve had it, and yet every single year at the end everyone goes, ‘Wow. How’d they do that?’ I promise you this year is going to be the same thing.”

But Newsom won’t be around for the next budget if he wins the race for lieutenant governor in November, and last year’s budget certainly wasn’t without pain.

Muni service was cut significantly, although more than half of those routes have been restored. City fees were raised on everything from catering service to ambulance rides. Hours were reduced at recreation centers and public swimming pools. Labor unions for city staff agreed to more than $200 million in concessions over two years and laying off of up to 425 workers, although only 134 have been given pink slips so far.

Those union give-backs are projected to cut about $62 million from next year’s deficit, part of at least $250 million the city expects to see chopped off the $712 million shortfall projected earlier, says a recent memo from Newsom’s budget director, Greg Wagner, that The Chronicle obtained. That would leave a $462 million gap, but there are other moving parts to the equation. The memo notes: “at this time we do not have a final projected deficit for FY2011-12.”

Supervisor John Avalos, chair of the Board of Supervisors’ budget committee, said: “$462 million is terrible, but not as terrible as I thought it was.”

Still, the deficit “means that we have to go through a very, very difficult process, cutting services, consolidating departments, looking at layoffs and finding cost savings where we can,” Avalos said.

City officials also need to consider new revenue sources, Avalos said, like his proposed increase in the property transfer tax and another measure on the November ballot to boost the hotel tax rate 2 percent for three years — efforts the mayor opposes.

Newsom said thousands of small cost-reduction moves will be the key, including cutting the city’s car fleet and cell phone use.

The budget memo comes as three bond-rating agencies affirmed the city’s credit worthiness, making it cheaper and easier to borrow, even as other cities have seen their ratings downgraded.

San Francisco topped New York, Chicago, Los Angeles, Oakland and Sacramento in its bond ratings from both Moody’s Investors Service and Standard & Poor’s. The only higher rated cities from those two services were San Jose and Boston.